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Mandatory early assessment of financial stress would save more SA businesses

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Mandatory early assessment of financial stress would save more SA businesses

17th August 2016

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Directors of financially distressed companies often do not see the writing on the wall before it’s too late. 

The challenge for directors therefore is to recognise early on that their companies are in trouble and that an intervention is required but still too many wait until things are desperate, making the potential for recovery even harder.

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South African business rescue legislation (Chapter 6 of the South African Companies Act, 2008), provides the necessary intervention mechanism to rescue companies that are financially distressed. It allows these companies, once they have been through the legislative rescue process, to exit such position and where such company can continue to trade on a solvent basis. 

Dr Eric Levenstein, director and head of the Business Rescue, Insolvency and Restructuring practice group at Werksmans Attorneys, proposed (in his recent doctoral thesis through the University of Pretoria) that the requirement to have a financially distressed company go through a formal and peremptory pre-assessment process to be a fundamental requirement.

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"The purpose would be to establish whether the company is a candidate for the rescue process or whether it should rather go into liquidation.

“Pre-assessment should become mandatory for boards of financially distressed companies. It can lead to a marked increase in companies being rescued.”

Levenstein suggested that the assessment of a company entering a period of “stress”, and where it is not quite yet full blown “financial distress” is the key to preserving value, resources and jobs in the failing company scenario. 

“There has to be an early identification of the issues that are dragging the company down into the quagmire of insolvency and failure,” he said.

Levenstein suggested that a comprehensive analysis of the company’s financial and turnaround potential be done as early as possible, so as to assess the prospect of such company surviving and continuing to trade, which is one of the aims and objectives of rescue practice.  

If these assessments are not undertaken, the result could be that creditors pursue directors for reckless and negligent trading in terms of the relevant sections of the Act.

“The early bird catches the worm. Directors who are appraised of these issues early on and who are focused on the potential of rescue options, can never be criticised for not trying to rescue their failing entity. Mandatory pre assessments may even stave off the business rescue process.

“Placing companies into liquidation, with resultant job losses, general negativity and the stigma attached to such liquidation process was never a positive outcome for the South African economy. Business rescue provides a viable alternative for the restructuring of the company's debt, management and prejudicial contracts which are dragging the company down into potential insolvency.”

If the assessment undertaken concludes that the company cannot be restructured or turned around on an informal basis, then directors are obligated to consider entering the formal business rescue procedures offered by Chapter 6 of the Act. 

Chapter 6 has provided an effective business rescue mechanism to saving companies that are teetering on the brink of insolvency. 

A business rescue practitioner would then be appointed by resolution of the board and he/she would then take control (working with current directors and management) in an effort to draft a rescue plan for consideration by creditors. 

“We have seen some good outcomes so far from the rescue process. Examples are Pearl Valley Golf Estate, Southgold Gold Mine, Advanced Technologies and Engineering Company, Ellerines, Moyo Restaurants and recently, Optimum Coal Mine,” said Levenstein. 

"There is no reason why continued successes should not be the outcome going forward."

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